Amicus Curiae Brief — Reves v. Ernst & Young

[gupreme court, U.S. |

FILED

Q) APR9 1992

No. 91-886 |

iHE —

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

BOB REVES, ROBERT H. GIBBS,

and FRANCES GRAHAM, as Representatives

of a Class of Note Holders,

Petitioners,

Vv.

ERNST & YOUNG,

- Respondent.

On Writ of Certiorari to the United

States Court of Appeals for the Eighth Circuit

BRIEF OF AMICUS CURIAE

NATIONAL ASSOCIATION OF INSURANCE

COMMISSIONERS, IN SUPPORT OF PETITIONERS

ELLEN G. ROBINSON

Counsel of Record

C. PHILIP CURLEY

ROBINSON CURLEY & CLAYTON, P.C.

300 South Wacker Drive

Suite 1700

Chicago, Illinois 60606

(312) 663-3100

Counsel for Amicus Curiae

Midwest Law Printing Co., Chicago 60611, (312) 321-0220

TABLE OF CONTENTS

TABLE OF AUTHORITIES ................. ii

INTEREST OF THE AMICUS CURIAE NA-

TIONAL ASSOCIATION OF INSURANCE

SEE oaacscccccececccccesaces

SUMMARY OF ARGUMENT ................

eee Te TTT TTT TET ET TTT

A. The Illegal Operation of an Insurance

Company Generally Requires the Cul-

pable Involvement of Independent En-

tities and Consultants ............... 6

B. Civil RICO Is a Tested and Successful

Weapon in the Fight Against Fraudulent

Operation of Insurance Companies ..... 8

C. The Court Should Adopt the Seventh Cir-

cuit’s Definition of “Participate,” Because

It Is Consistent With the Meaning of the

Plain Language of the Statute ....... 12

D. The Litigation Floodgates Will Not Open

as a Result of Adopting the Seventh Cir-

cuit’s Construction of the Participation

PEE VOCAN dead s dbs inves ddbdeedeee 17

CONCLUSION .......... SUMaSVSUSERSéeKO Odes 19

ij

TABLE OF AUTHORITIES

Cases

Arthur Young & Co. v. Reves, 937 F.2d 1310 (8th

CoP. BRED cccccecceuectecnceeuneseel

Bank of America National Trust & Savings Asso-

ciation v. Touche Ross & Co., 782 F.2d 966

ob oe Pee ee

Bingham v. Zolt, 683 F.Supp. 965 (S.D.N.Y. 1988) ..

Browning Avenue Realty Corp. v. Rosenshein, 774

F. Supp. 129 (S.D.N.Y. 1991) ..............

Corcoran v. American Plan Corp., 886 F.2d 16 (2d

Clr. GERD ocvccccecccscccenenanauenseueues

Curiale v. Peat, Marwick, Mitchell & Co., No.

po (N.Y. Sup. Ct. N.Y. Cty., Jan. 10,

SOND oc ccccccccevcovescceesénassen

Dept. of Economic Development v. Arthur Ander-

sen & Co., 747 F.Supp. 922 (S.D.N.Y. 1990) ...

Durish v. Uselton, Mealey’s Insurance Insolvency,

August 15, 1990 at D-1 (N.D. Texas 1990) ...

Feinstein v. Resolution Trust Corp., 942 F.2d 34

Chat Clip. BEDE) oc cccccenchuctscunnauneneees

Fleischhauer v. Feltner, 879 F.2d 1290 (6th Cir.

1989), cert. denied, 494 U.S. 1027 (1990) ....

Friedman v. Arizona World Nurseries Ltd., 730

F.Supp. 521 (S.D.N.Y. 1990), affd., 927 F.2d

Re be Se ere

Gallinger et al. v. B.D. Owens et al., CV 91-1867

PHXWPC (D. Ariz., filed Nov. 25, 1991) ....

Garamendi v. Harry O. Miller et al., No. BC007903

(Super. Ct. Los Angeles Cty., Calif., filed Au-

qams UD, TRUE) cccccccccecccesseusuesseuees

PAGE

5, 12

10

10

Gilmore v. Berg, 761 F.Supp. 358 (D.N.J. 1991) ..

i > v. McNiff, 744 F.Supp. 1237 (S.D.N.Y.

LOSSES CELE PEOPLE TE TET

ua ae v. Northwestern Bell Telephone Co., 492

EEL ELE EIST ETTTETS

Hartz v. Friedman, 919 F.2d 469 (7th Cir. 1990) ..

Hunt v. American Bank & Trust Co. of Baton

Rouge, 783 F.2d 1011 (11th Cir. 1986) .....

Ikuno v. Yip, 912 F.2d 306 (9th Cir. 1990) .....

James v. Meinke, 778 F.2d 200 (5th Cir. 1985) ..

LaSalle National Bank v. Arthur Andersen, No.

com 17602 (Cir. Ct. Cook Cty., Ill., July 27,

ENE EEE

Levine v. American Federal Group, Ltd., Mealey’s

Insurance Insolvency, March 18, 1992 at C-1

I TEE oc occcccccccccetccecees

Manax v. McNamara, 842 F.2d 808 (5th Cir.

EEE EEE

Miller v. Affiliated Financial Corp., 624 F.Supp.

I Eo ccc ccccocccccovccecs

aw 5 S.A. v. Conticommodity Services, Inc.,

F.Supp. 151 (S.D.N.Y. 1988) ...........

Robertson v. White, No. 85-2044 (W.D. Ark., Oct.

EEE EEE

Schacht v. Brown, 711 F.2d 1343 (7th Cir.), cert.

denied, 464 U.S. 1003 (1983) ...............

Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479

EEE re

Stamp v. Brown, No. 81 C 1475 (N.D. IIL, Feb. 20,

EE SLE

9, 18

16, 17

iv

State Farm Mutual Auto Insurance Co. v. Rosen-

field, 683 F.Supp. 106 (E.D. Pa. 1988) .....

State of Florida Department of Insurance v. Mer-

rill L , No. 91-17911 (Circuit Ct. Duval

Cty., Florida, filed Dec. 20, 1991) ..........

State of New York v. O’Hara, 652 F.Supp. 1049

Es. EEE. coeccvccsctcechdetenasnes

State of North Carolina ex ae v. Alexander

& Alexander, 680 F.S .D.N.C. 1988)

and No. 86-1247-Civ. SHDN Ne. Jan. 22, 1992) ..

Town Page a 5 Hudson Meadows Urban Re-

.2d 1263 (8rd Cir. 1987) .......

omni States v. Blackwood, 768 F.2d 131 (7th

Cir.), cert. denied, 474 U.S. 1020 (1985) .....

United States v. Bright, 630 F.2d 804 (5th Cir.

BREED cccccccoucscvevecedsevedscesveceesern

United States v. Cosentino, 869 F.2d 301 (7th Cir.),

cert. denied, 492 U.S. 908 (1989) ...........

United States v. Elliott, 571 F.2d 880 (5th Cir.),

cert. denied sub nom. Delph v. United States,

GD DR GED GPG) cv ccccccccccccccvccecees

— v. Forsythe, 560 F.2d 1127 (8rd Cir.

BOOED ccccccccccevcossecscecsescosscucescee

1987) ...... agin atmo Te nae '

United States v. Joyce, 499 F.2d 9 (7th Cir.), cert.

denied, 419 U.S. 1031 (1974) ...............

United States v. Kreimer, 609 F.2d 126 (5th Cir.

PEED Sed cévcveccevesceuesccsséescceeceocse

1988) ...... cguitepandde ca Alea

United States v. Provenzano, 688 F.2d 194 (8rd

Cir.), cert. denied, 459 U.S. 1077 (1982) .....

15

15

Vv

United States v. Starnes, 644 F.2d 673 (7th Cir.),

cert. denied, 454 U.S. 826 (1981) ........... 14

United States v. Yonan, 800 F.2d 164 (7th Cir.

1986), cert. denied, 479 U.S. 1055 (1987) . 15

Virden v. Graphics One, 623 F.Supp. 1417 C. D.

Se EE Sbtheentednccsdonsnenssescesuese 16

Statutes

ee eee ae b cdencecdunes passim

PE, GE ED cc cccccccccccceseses 11

Other Authorities

50 Ill. Admin. Code 925 (1975) ............... 8

113 Cong. Rec. 17949 (1967) ..............045. 16

116 Come. Ros. GOB (IGTD) 2... nc cccccccccccces 16

Staff of House Comm. on Energy and Commerce,

101lst Cong. 2d Sess., “Failed Promises; In-

surance Company Insolvencies” (Comm. Print

SE St bien cdkcondnesededeeveesdeececs 6, 7

Vol.IA 1991 Proceedings of the NAIC 319 ..... 8

No. 91-886

IN THE

Supreme Court of the United States

OcTOBER TERM, 1991

BOB REVES, ROBERT H. GIBBS,

and FRANCES GRAHAM, as Representatives

of a Class of Note Holders,

Petitioners,

Vv.

E YO ,

— 2 Respondent.

On Writ of Certiorari to the United

States Court of Appeals for the Eighth Circuit

BRIEF OF AMICUS CURIAE

NATIONAL ASSOCIATION OF INSURANCE

COMMISSIONERS, IN SUPPORT OF PETITIONERS

INTEREST OF THE AMICUS CURIAE

NATIONAL ASSOCIATION

OF INSURANCE COMMISSIONERS

The National Association of Insurance Commissioners

(“the NAIC”) is a voluntary unincorporated association

comprised of the chief insurance regulatory officials with

afin

principal responsibility for supervising the business of in-

surance in the states, territories, and insular possessions

of the United States. As stated in its constitution, the

organization aims to help state officials achieve fundamen-

tal insurance regulatory objectives, among which is effec-

tive financial solvency regulation.

This objective has assumed special prominence in recent

years as the failure of major insurers has left millions of

policyholders holding worthless policies and annuities. The

NAIC’s members have found that their ability to iden-

tify a company in financial distress in time to avert failure

requires that they receive complete and honest informa-

tion about the financial condition of the companies they

regulate. Fraud and other acts of dishonesty in reporting

financial information frustrate this solvency regulatory

process, whether the dishonesty is attributable to com-

pany owners and managers or independent consultants,

such as auditors, actuaries and attorneys, all of whom are

essential participants in the financial reporting process.

Where an insurance company’s failure is the result of

fraud or other dishonesty, the NAIC’s members believe

the perpetrators should be punished and, if possible, the

victims—including the defrauded company and its policy-

holders—compensated by the wrongdoers. The members

have found RICO, including both its criminal penalties and

civil remedies, to be a strong and useful enforcement tool.

Therefore, the NAIC, in assisting its members to fulfill

the fundamental regulatory objective of effective solvency

regulation, has a direct interest in assuring the continued

availability of civil and criminal RICO as a vehicle for

compensating its victims and for punishing dishonesty,

whether perpetrated by company management or by in-

dependent entities and consultants.

ulin

The NAIC’s members believe that the Eighth Circuit’s

interpretation of RICO’s “participation” element shields

independent entities and consultants from RICO liability,

even where their conduct has been essential to the per-

petration of an illegal scheme that has caused or concealed

an insurance company’s insolvency. To this end, the NAIC

supports the position of the Petitioners in urging the re-

versal of the Eighth Circuit opinion. The parties have con-

sented to the filing of this brief, and the consents are on

file with the Clerk of the Court.

SUMMARY OF ARGUMENT

The Eighth Circuit held that an accounting firm that

misrepresented its audit client as solvent when in fact it

knew the client was insolvent could not be liable for a

RICO violation, because an outside auditor does not “‘op-

erate” or “manage” the client company, and therefore can-

not participate, even indirectly, in the conduct of its af-

fairs within the meaning of RICO, 18 U.S.C. §1962(c). But

the key actors in successful frauds involving the illegal

operation of insurance companies invariably include inde-

pendent entities, such as insurance agencies, brokers and

reinsurers, and consultants, such as accountants, actuaries

and attorneys. Therefore, if the Eighth Circuit’s holding

is affirmed, these wrongdoers will be effectively immu-

nized from RICO prosecution, even where their miscon-

duct proximately caused injuries to insurance companies

and their policyholders.

The holding should not, however, be affirmed. It ignores

the plain language of RICO, which proscribes misconduct

~

by those who directly and indirectly participate in the con-

duct of a company’s affairs, and so it is contrary to Con-

gress’s intent that the statute apply to independent third

parties as well as company insiders; it eviscerates RICO

as a weapon against fraudfeasors who happen not to be

part of the inside management team; and it is not neces-

sary for preventing frivolous RICO claims from clogging

our courts.

Recent insurance company failures, caused or concealed

by fraud and deceit in the operation of the failed com-

panies and false financial reporting about the failed com-

panies, have already cost the American public many bil-

lions of dollars. A congressional subcommittee studying

whether the insurance industry will suffer a disaster in

the 1990’s of the same magnitude as the savings and loan

disaster of the 1980’s, recently encouraged responsible of-

ficials to pursue those—company insiders and independent

entities and consultants alike—who commit frauds against

insurance companies. Insurance officials charged with liqui-

dating the estates of insolvent insurers have successfully

used RICO to recover damages from both company in-

siders and outside entities and consultants on behalf of

the insolvent insurers and their policyholders. The NAIC

and its member state officials, therefore, urge that the

Eighth Circuit’s decision be reversed in order to preserve

the scope of RICO as a forceful deterrent and remedial

provision.

a

ARGUMENT

A federal jury found the accounting firm, Arthur Young

& Co., guilty of acts of federal and state securities fraud

in connection with its audits of a grain cooperative (“the

Co-op’’). The victims of the fraud were farmer-members

of the Co-op, who lent it money on the strength of Ar-

thur Young’s representations—which turned out to be

misrepresentations—about the Co-op’s financial condition.

The jury was not allowed, however, to consider whether

Arthur Young also violated RICO, 18 U.S.C. §1962(c),!

because the district court held that, as a matter of law,

an auditor’s involvement with its client does not constitute

“participation” in the conduct of its client’s affairs within

the meaning of the statute. On review, the Eighth Cir-

cuit characterized Arthur Young’s actions as “reprehen-

sible,” but affirmed the lower court’s decision, because

under its view, one who does not “operate” or “manage”

the entity identified as the RICO enterprise cannot par-

ticipate, even indirectly, in the conduct of its affairs within

the meaning of section 1962(c). Arthur Young & Co. v.

Reves, 937 F.2d 1310, 1324 (8th Cir. 1991).

If this decision is affirmed, it will render RICO useless

as a tool for pursuing those whose illegal operation of in-

surance companies has ruined solid businesses, left policy-

1 Section 1962(c) provides:

It shall be unlawful for any person employed by or associated

with any enterprise e in, or the activities of which af-

fect, interstate or foreign commerce, to conduct or participate,

directly or indirectly, in the conduct of such enterprise's af-

fairs a pattern of racketeering activity or collection

of unla debt.

™

holders with worthless claims against insolvent companies,

and imposed a multi-billion dollar burden on the American

public.? For this reason, the NAIC and its member state

insurance regulators join the petitioners in urging reversal

of the Eighth Circuit decision.

A. The Illegal Operation of an Inswrance Company General-

ly Requires the Culpable Involvement of Independent

Entities and Consultants.

Insurance companies, the repositories of huge sums of -

money derived from policyholders’ premium dollars, are

attractive targets of fraud.* There are two typical config-

urations of fraud involving the illegal operation of insur-

ance companies. In one, the company’s assets are siphoned

off, usually through affiliates, agents, and reinsurers. In

the other, the company’s insolvency is concealed so that

it can continue to take in money by selling policies that

later turn out to be of no value.

2 A ional subcommittee (“the Dingell Committee”’) inves-

tigating causes of insurance company insolvencies found that

four recent failures—all of which the subcommittee attributed at

least in = to fraud and deceit—would alone cost the public $5

billion. Staff of House Comm. on Energy and Commerce, 101st

Cong. 2d Sess., “Failed Promises; Insurance Company Insolven-

cies” at 2-3 (Comm. Print 101-P 1990) [hereinafter cited as Failed

Promises}.

% As the Dingell Committee explained it:

The business of insurance is uniquely suited to abuse by mis-

ment and fraud. Making believable fae is a stock

an irresistible target for financial knaves and buccaneers.

Failed Promises at 3.

- =

Most often, these frauds are perpetrated as the joint

effort of company management or employees and third

party wrongdoers, and result in bankrupting solvent com-

panies or deepening an already existing insolvency. For

example, the Dingell Committee concluded that the failure

of Mission Insurance Company, one of the largest insur-

ance company insolvencies in history, was fueled by the

deceit of agents and reinsurers doing business with Mis-

sion; and that it was concealed by false financial reports

filed with regulators by Mission and the auditors of Mis-

sion’s parent. Failed Promises at 16-21.

This deceit was not unique to Mission. Many docu-

mented frauds against insurance companies involve third

parties acting in concert with company managers to skim

money through inflated commissions and fees.* Others in-

volve fraudulent investments of policyholder premium dol-

lars in sweetheart deals or non-performing loans; and still

others involve complex schemes with third parties in

which sham reinsurance is used artificially to inflate

policyholders’ surplus.®

4 E.g., Curiale v. Peat, Marwick, Mitchell & Co., No. 2310/87

(N.Y. Sup. Ct. N.Y. Cty., Jan. 10, 1992) (alleged diversion of $10

million in excessive management fees; aoanery eee denied);

State of Florida Department of Insurance v. Merrill Lynch, No.

91-17911 (Circuit Ct. Duval Cty., Florida, filed Dec. 20, 1991) (liqui-

dator’s complaint alleging looting through excessive fees, compen-

sation and dividends, as well as fraudulent scheme to con-

ceal insurer’s insolvency).

5 For example, the Dingell Committee singled out the “irrespon-

sible junk bond practices” of First Executive Corporation. Failed

Promises at 7. .

6 Failed Promises at 42 describes a sham reinsurance scheme

that enabled Transit Casualty my soy My lull regulators by re-

rting a stable surplus when in fact company was insolvent

by billions of dollars. See also Levine v. American Federal hs

Ltd., Mealey’s Insurance Insolvency, March 18, 1992 at C-1 (N.Y.

App.Div. 1992) (dispute involving broker who allegedly placed rein-

surance with a reinsurer known to be insolvent).

—8—

A goal of insurance regulation is detecting these frauds

before they cause company failure. But most of the reg-

ulators’ information about insurance companies comes from

the companies themselves, primarily through detailed fi-

nancial statements filed with the regulators at least an-

nually. Thus, where the illegal scheme includes conceal-

ing a failing or insolvent financial condition through, for

example, fraudulently underreported loss reserves or sham

reinsurance, the regulators’ ability to detect the fraud is

dependent in the first instance on the honesty of persons

who, in fact, are perpetrating and concealing it. Negligence

and defalcations in financial reporting have prompted reg-

ulators to require companies to provide actuarial opinions

on the adequacy of loss reserves and to obtain annual

audits of their balance sheets and income statements from

independent certified public accountants.” The regulatory

purposes of these initiatives are obviously frustrated when

consulting actuaries and independent auditors lend their

prestige and knowingly join management’s scheme to

cover up an insurer’s true financial condition.

B. Civil RICO Is a Tested and Successful Weapon in the

Fight Against Fraudulent Operation of Insurance Com-

panies.

The mail and wire fraud statutes have always been ef-

fective vehicles for criminally prosecuting those involved

in the fraudulent operation of insurance companies.* What

7 The so-called audit rule, which has been in force in some states

since the 1970's, e.g., 50 Ill. Admin. Code 925 (1975), was recent-

ly adopted as an amendment to the Annual Statement Instruc-

tions, and thereby made applicable in all states. Vol.1[A 1991 Pro-

ceedings of the NAIC 319.

8 E.g., United States v. Cosentino, 869 F.2d 301 (7th Cir.), cert.

denied, 492 U.S. 908 (1989) (criminal conviction for siphoning off

(Footnote continued on following page)

~ =

was historically missing, however, were effective civil rem-

edies for compensating the victims of the frauds—the com-

panies and their policyholders. RICO has filled that gap.

The first civil RICO complaint on behalf of a defrauded

insurance company, filed in 1981, is described in Schacht

v. Brown, 711 F.2d 1343 (7th Cir.), cert. denied, 464 U.S.

1003 (1983). Schacht was the liquidator of Reserve Insur-

ance Company, an insolvent Illinois property and casualty

insurer faced with a $100 million deficit. He brought a

RICO suit against the company’s officers, directors, rein-

surers, auditors and others. As the Seventh Circuit de-

scribed it, the defendants were charged under 18 U.S.C.

§1962(c) with participation in a “multifaceted, fraudulent

scheme, which kept Reserve operating long past insolven-

cy in a manner which resulted in enormous losses to the

latter company.” 711 F.2d at 1346. The scheme could not

have succeeded without the help of the third party wrong-

doers: the reinsurer, which (the complaint alleged), in ex-

change for a multimillion dollar fee, entered a financing

transaction that was falsely presented on Reserve’s finan-

cial statements as reinsurance; and the auditors who (al-

legedly) consented to the false and misleading presentation

of the financing transaction in Reserve’s financial state-

8 continued

insurance company assets ry * affiliated broker affirmed); United

States v. Joyce, 499 F.2d 9 (7th Cir.), cert. denied, 419 U.S. 1031

(1974) (affirming mail fraud conviction of schemers who persuaded

people to place insurance with an under-capitalized insurance com-

pany and then siphoned off the premium dollars for personal use);

nited States v. Kreimer, 609 F.2d 126 (5th Cir. 1980) (affirming

conviction where an insurance company was defrauded by agents

who accepted secret fees and commissions for policies they wrote

for the company).

=<

ments and failed to disclose Reserve’s insolvency. Jd. at

1345.®

Other liquidators of insolvent insurers who have sued

under RICO have also achieved recoveries on behalf of

defrauded companies. As examples, the liquidator of Beacon

Insurance Company recently obtained a multimillion dollar

settlement of a RICO suit against a group of agents and

brokers who, he claimed, defrauded Beacon into accepting

imprudent risks for insufficient premiums. See generally

State of North Carolina ex rel. Long v. Alexander &

Alexander, 680 F.Supp. 746 (E.D.N.C. 1988) and No. 86-

1247-Civ.-5 (E.D.N.C. Jan. 22, 1992) (dismissal order). And

a jury ordered the majority shareholder of an insolvent

Texas insurer to pay in excess of $1 million (trebled) in

RICO damages for his participation in a scheme to siphon

off company assets through excessive commission pay-

ments to an agency owned by the shareholder. Durish

v. Uselton, Mealey’s Insurance Insolvency, August 15,

1990 at D-1 (N.D. Texas 1990).!°

® The Reserve litigation recently settled. Stamp v. Brown, No.

81 C 1475 (N.D. Ill., Feb. 20, 1992) (dismissal orders). By Lu

ment of the parties the dollar amount of the settlement be

disclosed later this month.

1¢ At least two other liquidators are presently pursuing RICO

claims on behalf of an insolvent insurer. Last year the liquidator

of the insolvent Coastal Insurance Company filed RICO claims

against persons and entities who allegedly diverted premium dol-

lars earmarked for Coastal to themselves. Garamendi v. Harry

fled August 10 M900); and Gallinge Pee oy py

inger . v. B.D. be

CV 91.1867 PHXWPC (D. Ariz., filed Nov. 25, 1991).

Several others have filed RICO claims that were dismissed as un-

timely or because of deficiencies. See Hunt v. American

Bank & Trust Co. of Baton , 783 F.2d 1011 (11th Cir. 1986)

(RICO claims for siphoning off insurer’s assets dismissed as time-

barred); Corcoran v. American Plan Corp., 886 F.2d 16 (2d Cir.

(Footnote continued on following page)

afin

The success of these prosecutions is attributable to the

availability of RICO. The liquidators’ state remedies for

fraud are burdened in ways RICO is not. These burdens

include state law privileges, inapplicable in federal ques-

tion cases, that protect the auditors of insurance com-

panies from having to produce their workpapers, even

when the auditors are sued for participation in schemes

to defraud the audited company;!! complicated and uneven

state laws of contribution and joint and several liability

that are inapplicable in RICO suits,!* but may allow cul-

pable defendants sued on state causes to avoid some or

all liability;4* and problems of service and venue presented

10 continued

1989) (liquidator’s RICO suit against persons and entities who

allegedly looted two defunct New York insurers dismissed under

the Second Circuit’s rule that there is no mail fraud violation in

the absence of a coalescence between the person deceived—there,

the regulators—and the person injured—the insurance companies).

1 For example, in Illinois an accountant is protected from pro-

ducing its w rs in discovery by the so-called “Accoun-

tant’s Privilege,” Ill.Rev.Stat. ch.111, , which the auditor de-

fendants unsuccessfully invoked in the Reserve Insurance Com-

pany RICO action. The same auditors were, however, successful

in preventing access to the same workpapers by bank creditors

of rve’s holding company in their state law civil fraud suits.

LaSalle National Bank v. Arthur Andersen, No. 82 L 17602 (Cir.

Ct. Cook Cty., Ill., July 27, 1984) (order denying plaintiff access

to audit workpapers due to state law accountant privilege).

12 The courts that have considered the issue have all held that

contribution is not available as to RICO liability. Miller v. Af

filiated Financial Corp., 624 Long = 1003 (N.D.Ill. 1985); Minpeco,

S.A. v. Conticommodity Services, Inc., 677 F.Supp. 151 (S.D.N.Y.

1988); Dept. of Economic Development v. Arthur Andersen & Co.,

747 F. . 922 (S.D.N.Y. 1990); and cf., Fleischhauer v. Feltner,

879 F.2d (6th Cir. 1989), cert. denied, 494 U.S. 1027 (1990)

(RICO liability is joint and several).

‘8 A total of twelve states have abolished joint and several lia-

bility, ten by statute—Arizona, Colorado, Connecticut, Idaho, In-

(Footnote continued on following page)

—12—

by state law actions involving a complex scheme, wrongful

conduct and injury spanning several states, and multiple

defendants, which are pretermitted by RICO’s liberal

venue and nationwide service of process provisions.

C. The Court Should Adopt the Seventh Circuit’s Defini-

tion of ‘‘Participate,’’ Because It Is Consistent With the

Meaning of the Plain Language of the Statute.

The successful civil RICO prosecutions brought by the

Reserve, Beacon and Texas Fidelity liquidators would

have been stillborn if they had been filed in the Eighth

Circuit, where the rule is that one who does not “operate”

or “manage”’ the entity identified as the RICO enterprise

cannot participate, even indirectly, in the conduct of its

affairs within the meaning of section 1962(c). Arthur Young

& Co. v. Reves, supra 937 F.2d at 1324. Key actors in

the schemes that ruined Reserve, Beacon and Texas Fi-

delity were accountants, outside consultants and other

third party wrongdoers: in Reserve they included the com-

pany’s auditors and reinsurers; in Beacon and Texas Fi-

delity they included brokers and agents.

These wrongdoers would have been excluded from the

litigation and insulated from liability under the Arthur

Young rule; and the liquidators would have been handi-

capped in their ability to discover, present and, of course,

remedy the full scope of the illegal conduct. In fact, as

=f}

a practical matter, where the RICO enterprise is a legiti-

mate company, the Eighth Circuit rule immunizes all per-

sons except company ownership and management from

section 1962(c) liability.* In turn, the rule eviscerates

RICO as an effective remedy for the victims of most

frauds involving the illegal operation of insurance com-

panies. This is an unfortunate and unnecessary result.

Section 1962(c) provides that it shall be unlawful for any

person employed by or associated with an enterprise ‘‘to

conduct or participate, directly or indirectly, in the con-

duct of [an] enterprise’s affairs” through a pattern of rack-

eteering activity. In its “operate” or “manage” construc-

tion of the participation element, the Eighth Circuit has

ignored the disjunctive wording of the statute: “‘conduct

or participate, directly or indirectly, in the conduct.” By

holding instead that a RICO defendant must conduct (de-

fined as “operate” or “manage’’) the enterprise’s affairs,

it has read out of Congress’s plain language the words

“or participate, directly or indirectly in the conduct.”

Other courts have not been so miserly in their reading

of the statute, and as a result, in other circuits RICO has

been available as a prosecutorial tool against all persons

involved in enterprise crimes. As the Eleventh Circuit

Arthur Young rule. In that | for

example, the plaintiffs had alleged the audit firm, in whose affairs

prise. The district court this was insufficient, because in its

view the acts charged were not “typical of the ice of

these profi ,” from which the court concluded the af.

fairs of the firm were not

yt * of racke-

ing activity. Robertson v. White, No. 85-2044 (W.D. Ark., Oct.

15, 1 (granting various motions for summary judgment)

Pet.App. at 72-3.

—14—

held in reversing a motion to dismiss an audit firm charged

under section 1962(c) with participating in the affairs of

its client, the alleged enterprise:

It is not necessary that a RICO defendant participate

in the ment or operation of the enterprise.

On its face, statute requires only that the defen-

a , directly or indirectly in the con-

duct [the] enterprise’s affairs. .. .” 18 U.S.C.

§ 1962(c). . . . Defendants argue that Congress in-

tended to limit the reach of a civil RICO action by

imposing a “conduct” requirement, i.e., that defen-

dant conducted or participated in the conduct of a

RICO enterprise in a signi t manner. This argu-

ee y or indirectly” language of

1962(c).

Bank of America National Trust & Savings Association

v. Touche Ross & Co., 782 F.2d 966, 970 (11th Cir. 1986).

The circuit with the most fully developed jurisprudence

on the “participation” element of RICO is the Seventh.

That court views the statute as sufficiently broad to en-

compass third party wrongdoers where: (1) they commit

the racketeering acts; (2) their position in or relation with

the enterprise facilitated commission of the acts, and (3)

the acts had “some effect” on the enterprise. United

States v. Pieper, 854 F.2d 1020, 1026 (7th Cir. 1988). As

the Seventh Circuit has explained:

The icipation in the i of e who

sass ach an the beatin i > aaneal of Figg nelle

in its affairs. The nature of racketeering connections

to an otherwise legitimate business suggests that

elements outside a company may assist in obtaining

the company’s illegal goals.

United States v. Starnes, 644 F.2d 673, 679 (7th Cir.), cert.

denied, 454 U.S. 826 (1981) (affirming the section 1962(c)

=

conviction of an arsonist hired by the corporate president

to burn the enterprise/company’s property). See also United

States v. Blackwood, 768 F.2d 131 (7th Cir.), cert. denied,

474 U.S. 1020 (1985) (affirming the section 1962(c) convic-

tion of a police officer who passed bribes to judges of the

enterprise/court); United States v. Horak, 833 F.2d 1235,

1239 (7th Cir. 1987) (“{C}onduct in section 1962(c) does not

mean ‘control’ or ‘manage,’ . . .” Therefore, an employee

of a division of a subsidiary of the charged enterprise/cor-

poration can participate in the conduct of the corporation’s

affairs within the meaning of section 1962(c)); United States

v. Yonan, 800 F.2d 164, 167 (7th Cir. 1986), cert. denied,

479 U.S. 1055 (1987) (attorney who bribed state prose-

cutors participated in the affairs of the enterprise/prose-

cutors’ office by conducting business with it, even though

he did not have a “stake or interest” in its goals).

18 As petitioners have pointed out, other circuits including at least

the Second, Third, Fifth, Sixth and Ninth, articulate the participation

element in slightly different words than the Seventh and Eleventh,

are the same: outsiders to the enterprise who affect

its affairs may be reached under section 1962(c). E.g., United States

. Provenzano 688 F.2d 194 (3rd Cir.), cert. denied, 459 U.S. 1077

iti;

fH

at

a

; '

ur

ESE

ny

atl

core

ate

22° ay

flee

| at

-

igh

38

—those merely ‘associated with’

enterprise—who directly and indirectly in the enter-

i v. F » 560 F.2d 1127, 1136

‘

7

|

af

3

i

|

i

(Footnote continued on following page)

—16—

It is the Seventh Circuit’s construction of the statute,

and not the Eighth Circuit’s, that gives full effect to Con-

gress’s intent, as expressed in the words it chose for sec-

tion 1962(c), that RICO reach every person who joins in

an enterprise crime—insiders and outsiders alike.'* This

Court has rebuffed all attempts to read into or out of

RICO requirements that do not appear in its plain lan-

guage. E.g., Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479

(1985) (holding RICO is to be “read broadly” and that

“amorphous standing requirements” should not be im-

posed on civil RICO). There is no principled reason to

read the words “or participate, directly or indirectly, in

the conduct of” out of section 1962(c). To do so would

eliminate liability for persons and entities who have en-

gaged in conduct otherwise proscribed by RICO.

18 continued

State of New York v. O'Hara, 652 F. . 1049, 1054 (W.D.N.Y.

1987) (contractor who submitted audulent bids on a m

waste clean-up contract participated affairs

pa da Virden v. Graphics One, 623 F. . 1417 (C.D. Cal. 1 =

“ss Snadiiitin indie side ines atk ited Me logit

history of RICO also suggests that it was intended to reach be-

yond those who own or Sa geeeee. Tis sea, See

pb debate noted it was

to snare accounting firms, 113 Cong. Rec. 17949 (1967);

[os Sn, Cee See eae, & 6

the accounting and insurance industries were specifically iden-

tified ss yy those RICO was intended to reach. 116

Cong. Rec (1970).

—17—

D. The Litigation Floodgates Will Not Open as a Result

of Adopting the Seventh Circuit’s Construction of the

Participation Element.

There need be no concern that an avalanche of civil

RICO lawsuits will be file? if the Court adopts the Sev-

enth Circuit’s construction of “participate.” Despite their

success in RICO actions, insurance liquidators have been

judicious in their resort to RICO. As to other RICO plain-

tiffs, the Seventh Circuit’s construction of the participa-

tion element has been the law for more than a decade,

and there is nothing to suggest that that circuit has ex-

perienced a disproportionate number of civil RICO filings.

In any event, “concern over the consequences of an un-

bridled reading of the [RICO] statute” is no excuse to

restrict its breadth. Sedima, S.P.R.L. v. Imrex Co., supra

473 U.S. at 481. And, in fact, very few plaintiffs have suc-

cessfully pled RICO violations against outsiders to the

identified enterprise, not because of defects in their allega-

tions regarding “participation,” but because of defects re-

garding other elements. For example, only a very few

civil RICO cases naming independent auditors and attor-

neys as defendants have withstood motions to dismiss in

recent years, and of those, half involved situations where

some or all of the alleged co-schemers had pleaded guil-

ty to criminal charges.’7 Most have been dismissed for

17 Reported opinions in which some or all co-schemers had pleaded

aulty to chained bend ove: Ikuno v. Yip, 912 F.2d 306 (9th Cir.

1990) (reversing summary judgment in avor of the attorney for

a “phantom” corporation, two of whose employees had pleaded

guilty to fraudulent operation of the erg | ); and State Farm

utual Auto Insurance Ty v. Rovenfiel, 68 F.Supp. 106 (E.D.

Pa. 1988) (attorney and doctors, guilty to criminal charges

of defrau an insurance compan a. summary judgment

on civil RICO claims brought by the defrauded company).

(Footnote continued on following page)

—-

deficiencies in the allegations of fraud,’® pattern,’® or

enterprise.?°

17 continued

Civil RICO complaints against independent audigors and attorneys

that have withstood mo to dismiss where rs had not

led guilty are described in Schacht v. Brown, supra 711 F.2d

Poek: Jones v. Meinke, 778 F.2d 200 (5th Cir. 1985) (affirming

RICO jury verdict —— CPA who gave clients false informa-

tion when soliciting them to invest in enterprises in which he had

an interest); Gilmore v. Berg, 761 F.Supp. 358 (D.N.J. 1991) (up-

holding RICO charges against attorney and accountant charged

with knowingly distributing materially false information to in-

vestors in limited ips); Gutfreund v. Christoph, 658

F.Supp. 1378 (N.D.IIl. 1987) (RICO claims upheld against accoun-

tant who allegedly prepared and distributed false financial projec-

tions circulated as part of the offering materials for a limited part-

nership investment).

18 E.g., Browning Avenue Realty Corp. v. Rosenshein, 774 F.

Supp. 129, 137-9 (S.D.N.Y. 1991); Griffin v. McNiff, 744 F.Supp.

1237, 1254-5 (S.D.N.Y. 1990); Friedman v. Arizona World Nur-

series Ltd., 730 F.Supp. 521, 545-6 (S.D.N.Y. 1990), aff'd., 927 F.2d

594 (2nd Cir. 1991).

1 E.g., Feinstein v. Resolution Trust ., 942 F.2d 34 (1st Cir.

1991) (attorney’s representation of plaintiffs at 25 real estate clos-

ings over a period of four months nt to satisfy “continu-

ity” of pattern requirement); Hartz v. Friedman, 919 F.2d

469 Oth Cir. 1990) (affirming Gismiseal of civil RICO wy 4

inst an attorney on “pattern” grounds and noting that

Seventh Circuit had not found patterns to exist in any civil RICO

cases since this Court’s decision in H.J. Inc. v. Northwestern Bell

Telephone Co., 492 U.S. (1989)).

20 E.g., Manax v. McNamara, 842 F.2d 808 (5th Cir. 1988);

Bingham v. Zolt, 683 F.Supp. 965 (S.D.N.Y. 1988) (Turkette-t

enterprises involving attorneys, auditors and others held insuffi-

cient where there was no threat of continued illegal activity).

CONCLUSION

The participation of independent entities and consultants

is essential to the ongoing operation of an insurance com-

pany. When these entities and persons join with company

management to commit a pattern of racketeering activ-

ity that defrauds the company and its policyholders, they

should be held accountable. To let the very persons with-

out which the RICO scheme could not have succeeded off

the hook is bad statutory construction and bad policy. For

all of the reasons stated above the decision of the Eighth

Circuit should be reversed.

Respectfully submitted,

ELLEN G. ROBINSON

Counsel of Record

C. PHILIP CURLEY

ROBINSON CURLEY & CLAYTON, P.C.

300 South Wacker Drive

Suite 1700

Chicago, Illinois 60606

(312) 663-3100

Counsel for Amicus Curiae

Dated April 9, 1992.